Does Xero work for NZ trust accounting?

Xero comes up regularly in conversations about NZ law firm accounting. Many firms use it, most PMS vendors integrate with it, and it handles the firm's general finances well. But a question that surfaces repeatedly is whether Xero can be used for the trust account itself.

The short answer is no. Here is why, and what the right structure looks like.

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What Xero is designed for

Xero is a general-purpose cloud accounting platform. It handles accounts receivable, accounts payable, payroll, bank reconciliation, and financial reporting for the firm's own finances. For law firm billing, profit and loss, and practice management reporting, it works well, which is why most cloud PMS vendors use it as the general ledger component.

What Xero was not designed for is regulated trust accounting under NZ law.

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What NZ trust accounting actually requires

NZ solicitors operating trust accounts work under the Lawyers and Conveyancers Act 2006 and the Lawyers and Conveyancers Act (Trust Account) Regulations 2008. The specific requirements that a software system needs to support:

• Three-way reconciliation: Every month, the bank statement balance, the trust cash book, and the total of all client matter ledger balances must agree. This is not a single report. It is a structured workflow with three separate legs that must reconcile.
• Monthly TAS certificate: Filed by the 10th working day of the following month under s115 and Reg 17. The system needs to produce this in the correct format.
• IBD handling: Under s114, client funds must earn interest where practicable. The system needs to track client funds in IBD accounts separately and allocate interest per client.
• NZLS Inspectorate readiness: Inspections are run via Audit Assistant. Your system needs to produce reports in the expected format without manual reformatting.

Xero handles none of these natively.

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Where Xero does fit in a law firm

Most cloud practice management systems use Xero (or MYOB) for the firm's general ledger. That is appropriate. In this setup:

• The PMS handles trust accounting: client ledgers, three-way reconciliation, TAS certificates, IBD
• Xero handles firm finances: billing, AR, payroll, P&L, tax reporting
• The two systems sync for billing and payment data

This is the correct structure. Xero as the general ledger alongside a purpose-built PMS trust accounting module. Not Xero alone.

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Why firms sometimes try to use Xero for trust accounting

Some smaller firms, particularly those without a dedicated PMS, attempt to run trust accounting through Xero using custom chart of accounts and manual workarounds. The problems with this approach:

• The three-way reconciliation has no native workflow. It requires manual processes each month.
• TAS certificate generation is not supported. The trust account supervisor re-keys data manually.
• IBD tracking per client is not built in.
• There is no tamper-evident audit trail in the format NZLS inspectors expect.
• Cyber insurance and compliance exposure increases when using a tool not designed for the purpose.

The short-term saving of not paying for a PMS tends to cost more in TAS time each month and creates meaningful regulatory risk.

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What to use instead

If your firm is managing trust accounting in Xero or through manual processes, the right move is to evaluate a purpose-built practice management system with a NZ trust accounting module. The key systems in the NZ market are OneLaw, LEAP, and Actionstep, each with different strengths and trade-offs for NZ trust accounting fit.

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Getting independent advice

Valley IT works with NZ law firms evaluating practice management software and trust accounting systems. We are vendor-neutral, with no referral fees or commercial relationships with any PMS vendor.

If your firm is running trust accounting in Xero or is unsure whether your current setup meets NZ regulatory requirements, book a free consultation.